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Rating Action:

MOODY'S UPGRADES WHEATON FRANCISCAN SERVICES (WI) RATINGS TO Baa1 FROM Baa2; OUTLOOK IS STABLE

23 Mar 2012

ACTION AFFECTS A TOTAL OF $742.5 MILLION OF RATED DEBT

New York, March 23, 2012 -- Moody's Investors Service has upgraded to Baa1 from Baa2 the long-term and underlying ratings assigned to the bonds of Wheaton Franciscan Services (WFS), which does business as Wheaton Franciscan Healthcare (WFH). The bonds were issued by the Wisconsin Health and Educational Facilities Authority. The rating outlook is stable at the higher rating level. The rating action affects the $742.5 million of outstanding debt listed at the conclusion of this report.

SUMMARY RATING RATIONALE

The upgrade to Baa1 from Baa2 reflects multiyear trend of financial strengthening, including expectations that FY 2012 will be another solid year, Wheaton's more manageable debt level that now carries relatively low risks related to debt structure, and its stronger balance sheet, which is characterized by a conservative investment allocation that is highly liquid. The improved credit position is offset by challenges that include operating in an increasingly competitive market, a high and rising Medicaid load, translating new strategies into enterprise growth as measured by revenues and continuing to evolve newly defined market and clinical strategies with a tighter footprint. The stable rating outlook reflects our belief that Wheaton will sustain or improve upon current levels of operating performance, maintain liquidity balances, and continue to focus on cost reduction and strategic revenue growth initiatives.

STRENGTHS

*Multi-year trend of marked financial improvement that continues through six months of FY 2012. FY 2011 marked the third consecutive year of profitable operations for Wheaton, with the system reporting a 1.5% operating margin and a 10.1% cashflow margin, comparing well to the Baa1 medians of 1.6% and 8.2%, respectively

*Wisconsin's hospital assessment is notably advantageous to Wheaton with annual net proceed ranging between $50 million and $60 million.

*Full array of primary, secondary and tertiary care services in geographic markets in Wisconsin, Iowa and Illinois with critical mass of over $1.7 billion of total operating revenue in FY 2011

*Absolute cash levels have improved materially to more than $552 million as of June 31, 2011 or 129 days cash and 71% cash to debt from just 86 days and 44% cash to debt at FYE 2009. Taking into account continued operating momentum, pension payments and more recent sale of Affinity assets (discussed below), management expects unrestricted cash investments to equate to at least 165 days and a healthier cushion of 93% cash to debt by FYE 2012

*Conservative investment portfolio allocations (17% equity; 82% cash and fixed income) as of June 31, 2011 which provides more than 2.7 times coverage of demand debt; 100% of Wheaton's unrestricted resources are liquid within 30 days

*Reduced leverage with modest exposure to liquidity banks; management reports no additional debt plans

*Demand, both inpatient and outpatient, has increased in Wheaton's remaining markets -- a trend that has been overshadowed by System reconfiguration and realignment. However, as reliance on Medicaid increases, volume has not translated into revenue growth

CHALLENGES

*We believe that the System is in a transition period, that while intentional has resulted in a smaller platform that bears the risk of being centric to a competitive market with a weaker payer mix (as evidenced by a growing reliance on Medicaid. Sustained enterprise growth will be a key measure of further credit improvement

*Underfunded pension ($164 million liability as of FYE 2011) continues to require funding ($34 million in FY12); though Wheaton has managed to make contributions in excess of expense and still build balance sheet cushion in recent years. Wheaton operates its pension as a Church plan which provides greater flexibility in funding requirements.

*Owned physician operations that continue to incur substantial losses but carry imputed value of referrals

*Ongoing and intensifying competitive pressures in each of the system's regions from both hospitals and the fluidity of physician alliances

Outlook

The stable outlook reflects our belief that Wheaton will sustain or improve upon current levels of operating performance, maintain liquidity balances, and continue to focus on cost reduction and strategic revenue growth initiatives.

What could change the rating--UP

Volume and revenue growth that translate into stable to growing operating profile; market share capture as a result of successful strategic service line offerings

What could change the rating--DOWN

Inability to maintain current performance; material decline in liquidity or additional debt that is not offset by cash and cashflow growth; market share erosion that compromises ability to grow revenue

The principal methodology used in this rating was Not-for-Profit Hospitals and Health Systems published in March 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

Although this credit rating has been issued in a non-EU country which has not been recognized as endorsable at this date, this credit rating is deemed "EU qualified by extension" and may still be used by financial institutions for regulatory purposes until 30 April 2012. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

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Beth I. Wexler
VP - Senior Credit Officer
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Lisa Martin
Senior Vice President
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

MOODY'S UPGRADES WHEATON FRANCISCAN SERVICES (WI) RATINGS TO Baa1 FROM Baa2; OUTLOOK IS STABLE
No Related Data.
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